Fitch Ratings has assigned a rating of 'BBB+' to Celulosa Arauco y Constitucion S.A.'s (Arauco) proposed notes due in 2020. Proceeds of the notes will be used for general corporate purposes and to repay upcoming debt maturities.
Fitch currently rates Arauco as follows:
--Foreign currency Issuer Default Rating (IDR) 'BBB+';
--Local
currency IDR 'BBB+';
--Senior unsecured debt due in 2010, 2011,
2013, 2015, 2017 and 2019 'BBB+';
--Senior unsecured debt due in
2017 issued by Alto Parana S.A. and guaranteed by Arauco 'BBB+';
--National
Scale 'AA (cl)';
--Senior unsecured Chilean peso denominated bond
lines due 2014 and 2029 and the bonds issued through those programs 'AA
(cl)'.
The Rating Outlook is Stable.
Arauco's credit ratings reflect its consistent approach to a conservative capital structure throughout the pulp cycle. The company's net debt-to-EBITDA ratio averaged 2.3 times (x) between 2005 and 2009, while its total debt-to-EBITDA ratio averaged 2.6x, despite more than $3.5 billion on capital expenditures and acquisitions. These investments have made Arauco one of the largest producers of market pulp globally and a leading manufacturer of board products in Latin America. Fitch's ratings build into its 'BBB+' ratings of Arauco an expectation that it will be able to continue grow its market presence without leveraging its balance sheet.
The ratings also reflect Arauco's strong business position, which are a result of having one of the lowest cost structures in the industry. The company's low-cost structure and working capital management allowed it to generate USD750 million of cash flow from operations (CFFO) during 2009 despite a downturn in the pulp and forest products industries that forced many producers to shutter facilities.
Arauco's competitive cost advantage, vis-a-vis large companies in the United States, Canada, or Europe, is viewed to be sustainable. It is primarily due to the fast growth rate of radiata and taeda pine trees on its forestry plantations. Arauco's production cost structure is further enhanced by modern production equipment, energy self-sufficiency, and low transportation costs due to the close proximity of its mills, forest plantations, and ports.
Fitch views positively factors the company's ownership of 1.6 million hectares of land in Latin America, on which it has developed nearly 1.0 million hectares of softwood and forestry plantations. Arauco's forests have an accounting value of USD3.8 billion and could provide the company with additional liquidity if needed.
Fitch expects Arauco's EBITDA to climb to more than USD1.3 billion during 2010 from USD725 million during 2009, and its CFFO to exceed USD1.0 billion. The improvement in the company's cash flow is primarily due to strong pulp demand and low inventory levels. High leverage within the sector has resulted in a lack of new market pulp projects and should result in a favorable price environment through the end of 2011.
Fitch projects a decline in Arauco's net debt to approximately USD2.450 billion during 2010 from USD2.669 billion during 2009, resulting in a net debt/EBITDA ratio of 1.9x and a CFFO leverage ratio of 2.4x. Arauco's net debt could be closer to USD2.200 billion if the company is successful in collecting USD200 million of insurance claims related to the Feb. 27, 2010 earthquake. This would lead to a net debt/EBITDA ratio of 1.7x.
The Stable Outlook reflects Fitch's view that Arauco will maintain its current financial profile. The company generates strong cash flow from operations. As a result, Arauco's leverage is largely dependant upon management's view of its ideal capital structure and its growth plans. Should management decide to maintain debt levels below current levels for a sustained period, Arauco's credit ratings could be upgraded. A rating downgrade could be triggered by a large debt-financed acquisition.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' dated Aug. 13, 2010;
--'Liquidity Considerations for
Corporate Issues' dated June 12, 2007.
Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Liquidity
Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
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